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Podcast: Tax Talks on Transfer Pricing

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This podcast was done in conjunction with Tax Talks on the key principles of Transfer Pricing.

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Tax Talks: Transfer Pricing feat. Benedicte Olrik

Featuring our Head of Transfer Pricing, Benedicte Olrik, this podcast is a great way to stay across the key principles of Transfer Pricing and learn more about methodologies you can employ. It also shares a simplified way that small businesses can stay on top of this seemingly complex space.

What this podcast covers:

  • MNE (Multi-National Enterprise)
  • ALP (Arm’s length price)

Five methodologies as outlined in the Taxation Ruling 97/20 (TR 97/20) including

  1. Comparable Uncontrolled Price (CUP) including a) the Internal CUP Method and b) the External CUP Method
  2. Resale Price Method (RP)
  3. Cost Plus Method (CP)
  4. Profits Split Method
  5. Transactional Net Margin Method (TNMM)

You’ll also learn tips on how a small to medium business can manage their Transfer Pricing issues through simplified transfer pricing record keeping – a case where less might be more, and look at the latest ATO update on simplified transfer pricing.

The world is getting smaller. More and more of our clients are not just trading in Australia but also overseas and don’t just have an Australian entity but also one overseas. And that creates a transfer pricing issue. The moment you set up an overseas entity, you have a transfer pricing issue.

Transfer Pricing

Transfer pricing wraps around two acronyms. MNE and ALP.


MNE stands for Multi-National Entreprise. And with that, you probably think of the big guys. But it can be anybody. It could be you setting up a single-member LLC in Wyoming. 

Transfer pricing only applies to MNE’s. If you are not a multi-national enterprise, then you don’t need to worry about transfer pricing.


ALP stands for Arm’s length price. That is what the transfer pricing legislation is aiming at. They want you to use a transfer price that a third party would have used. So not a mate’s price.

MNE and ALP – those two acronyms are really what all transfer pricing is about. Multinational enterprises and arm’s length prices.

Five Methodologies

To determine your transfer price, you need to use one of five methodologies. These five methodologies are outlined in Taxation Ruling 97/20 (TR 97/20).

TR 97/20 is the tax ruling you need to consult to work out your transfer pricing issue. And there the ATO goes through the five methodologies in quite a bit of detail.

1 – Comparable Uncontrolled Price (CUP)

The first methodology – the so-called ‘CUP method’ – CUP as in comparable uncontrolled price – the CUP method is quite easy to grasp. If you sell the same product or service to others, then you just use that price. That is your CUP.

To use this price, the product itself, sales volume and the terms and conditions must be comparable. If the product is quite different or the sales volume or the terms and conditions are miles apart, then the price is not comparable and you can’t use the CUP method. 

Now, depending on who those others are, there is the so-called ‘internal CUP method’ and the ‘external CUP method’.

1a – Internal CUP Method

You use the internal CUP method if you are selling the same quantity of the same product with the same terms and conditions to third parties as well as a subsidiary.

In that case, your sale to third parties gives you your CUP. 

Let’s say you are a mining company and you mine rare earth in Western Australia. Your rare-earth is high in Monazite and Thorium, but you don’t have the facilities to refine it and so you sell it to China, which extracts the Monazite and Thorium and sells it to battery producers and so on.

Now you have decided to set up your own refinery, for example in Canada and you so you set up a company in Canada. Now you are selling your rare earth to China as well as your related party in Canada.

So for that, you use the internal CUP method. You take the price China pays you and that is what you charge your related party in Canada.

1b – External CUP Method

Let’s say you are still a mining company but so far you didn’t do rare earth. But now you got the mining rights to a rare earth field with lots of Monazite and Thorium in WA. And rather than selling it to China like your competitors, you set up your own refinery in Canada, because God knows how things will pan out with China long-term.

So you don’t have an internal CUP because you are not selling to a third party overseas. But your competitors do and they give you an external CUP. You look at what they sell their unrefined rare earth for and that is your external CUP. 

So both your internal and external CUPs are quite straightforward if you have the data.

The challenge with both the internal and external CUP of course is that very often you don’t sell the same product as somebody else. If you don’t sell a commodity, then your product is probably unique and different to what somebody else is selling. And then it is difficult to get a comparable price. So that is why the CUP method – while easy in theory – is actually not that widely used.

Just a side comment, TR 94/14 apparently also gives you a few examples for the CUP method, but we haven’t checked this one out. The CUP method is not so difficult to grasp that we would need more examples.

2 – Resale Price Method (RP)

The second method is the resale price method – the so-called ‘RP method’ – listed in TR 97/20. Benedicte actually lists this as the third method in this episode, so hopefully, this won’t confuse you.

You look at the profit margin that others are getting. Let’s say you have manufactured a widget and now sell it to a subsidiary. And there are three other firms that sell a similar widget. And they all realise a 100% sale margin. So then you take their resale price, divide it by 2 and that is your transfer price to your subsidiary.

So if they sold this widget for AUD 200 retail, you would set your transfer price at AUD 100. 

3 – Cost Plus Method (CP)

The third method is the so-called ‘cost-plus-method’ and it uses a similar approach as the resale price method, just the other way around and slightly different.

So you look at the margin that others are making for the same or a similar product, and then you apply this to your cost.

Now for both methods – the RP and the CP method – you look at gross margins. The problem of course is, how do you work out what gross margin others are making? They are not going to tell you. It’s not like you can google this stuff. 

The ATO realises this, so they write in TR 97/20:

“The application of the RP and CP methods is dependent on information about arm’s length margins being available to either the taxpayer or the ATO. As there is no current requirement in Australia for companies to publicly disclose their gross margins, it may be difficult for taxpayers to obtain the information needed to apply either of these methods”.

So these are the transaction-based methods – the ATO calls them the ‘traditional methods’ – and apart from CUP for commodities, not really that widely used. 

But then you have the two profit methods.

4 – Profits Split Method

For the profits split method, you look at the total profit made from start to finish and then ask, “If all these associated entities had traded at arm’s length, how would the profit most likely have been distributed? What profit would be economically viable in each transaction?”

And based on this you work out the profit margin in each transfer.

5 – Transactional Net Margin Method (TNMM)

This one is the most commonly used one. The big difference is that this one uses the net margin. RP and CP used gross margins, but this one uses the net margin.

The profits split method looks at the profit in the entire pipeline and then allocates it. Whereas this method looks at one transaction and then compares it with the net margin of your competitors selling similar things.

Justified Confusion

Now if you are seriously confused you are not alone. It all feels like smoke signals to most, look at these funds transfer pricing example for more clarity.

And so the big question is, how is a small to medium business meant to cope with this? The methods sound like an academic exercise. Worlds apart from a small business in the trenches trying to make a living.

How are they meant to work out how to apply one of these methods?

And if they don’t, if they basically just muddle through this transfer pricing problem, how likely are they to get audited?

This sets the stage for simplified record keeping – officially called ‘simplified transfer pricing record keeping’. Because this is actually not a different method. It just means you need to document less.

And that is what Benedicte Olrik of Andersen Australia will discuss with you in the next episode, ep 385. Simplified transfer pricing record keeping will be the white knight in the night to save you.

For any enquiries related to this update, contact us today.

Benedicte Olrik

Benedicte is the Managing Director of Transfer Pricing at Andersen Australia. With 16+ years of global experience, she excels in APAs, transfer pricing compliance, planning and policy

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